The US energy sector is presently undergoing a tectonic shift that has global ramifications due to the importance of the US economy (the world’s largest in 2013), and due to the numerous global geopolitical conflicts that are significantly impacted by trends in the oil and gas industry.
Three key developments are causing this metamorphosis in the US energy sector:
I. Increased Production & Reduced Imports
Breakthroughs in oil and gas extraction technologies (in particular, hydraulic fracturing and horizontal drilling) have spurred a boom in US oil and gas output from shale formations. As a result, US crude oil production grew by over 30 percent between 2011 and 2013. This growth trend is expected to continue in 2014 and 2015, and the U.S Energy Information Administration (EIA) has projected that US crude oil output in 2015 will be the highest it has been since 1972.
More importantly, the share of US crude oil consumption that is met by imports will decline from 33 percent in 2013 to 21 percent in 2015 according to the EIA. Some forecasts even have the US overtaking Saudi Arabia as the world’s largest oil producer in 2014 or 2015. In the long run, the US is expected to entirely erase its trade deficit in crude oil and become a net exporter. In 2013, the US also became the world’s largest natural gas producer, a product in which it will become a net exporter by 2018.
II. Declining Demand
A combination of factors is resulting in declining demand for oil consumption from the large US motor vehicle market. The single biggest of these is the increasing fuel efficiency standards of new vehicles. Besides benefitting from rising demand for hybrid and electric vehicles, fuel efficiency standards in the US are rising due to car manufacturers preparing for more stringent Corporate Average Fuel Economy (CAFE) standards. These new stricter standards are based on a 2011 agreement between the Obama administration and car manufacturers that will require average manufacturer fleet fuel economy standards of cars and light-duty trucks to rise to 54.5 miles per gallon by 2035.
Other factors resulting in declining oil consumption in the US motor vehicle market include less interest in driving among younger professionals; a reverse migration of people from suburbs to cities leading to greater use of public transportation; increasingly bicycling friendly cities; newer car sharing (e.g., Car2Go, Zipcar) and ride sharing (e.g., Lyft, Sidecar, Uber) options that reduce the necessity of owning a car in cities; increasing remote working-from-home options in the internet age; and an overall greater environmental awareness resulting in a reduction in wasteful driving habits.
III. Declining Prices
The last big recent development impacting the US (and world) oil and gas sector is a major decline in oil prices in 2014. Average crude oil prices have dropped from a peak of around $110 per barrel in the summer of 2014 to under $70 a barrel as of early December 2014, a price not seen since 2010. Most projections suggest that this lower price will be sustained through 2015, and might even fall further if supplies from the war torn parts of the Middle East rise back to their prior peak levels and if Saudi Arabia continues to refuse to reduce output. Below is a chart from the US EIA that tracks the $/barrel spot price of US and European crude oil indexes from 1985 through 2014:
About Solutions4Business Research & Analytics Practice: Solutions4Business offers its clients the option to request customized research solutions in order to drive their business forward by learning from key market insights. To contact our Market Research team or learn more about the service, visit the service overview page by clicking below.